If you've considered entering the real estate investment arena, you might be aware of the considerable effort required to take the initial steps. The idea of becoming a real estate owner is enticing for many, offering the prospect of generating income through property rentals.
However, time constraints often come into play. Who wouldn't want to own properties and generate rental income? After all, once expenses are covered, the result is pure profit – appreciation, cash flow, and equity, provided your strategy is well-positioned. This aligns with your financial aspirations and future goals. But here's the challenge: taking action. As you embark on researching how to purchase your first rental property, you find yourself in uncharted territory. The workload appears daunting. How will you find the time to manage each task effectively?
Doubts may start creeping in. Questions
about the market, location, neighborhoods, residents, comparable properties, prices, rents, and more arise. You quickly realize that successful real estate investment demands more of you than you initially anticipated. The realization dawns upon you: 'This is much more intricate and time-consuming than I can manage alongside my demanding career and personal life.'
Enter real estate syndications – the solution to this very conundrum.
Real estate syndications offer a way to gain all of the benefits of investing in real estate without the headaches of doing all the work yourself. In this guide, you'll delve into investing in real estate syndications and learn how to step into property ownership in a passive manner.
A Truly PASSIVE Investment
Syndications prove incredibly valuable for investors seeking a hands-off approach. They provide an avenue to property ownership without the steep learning curve of how to acquire good deals, how to manage them, and execute on business plans that return the best value per dollar invested.
In Real Estate Syndication, Limited Partners (LPs) are leveraging the experience and time of General Partners (GPs) to operate a property to its fullest potential. This eliminates the need for you to find, acquire, manage, and dispose of a property. In essence, in a multifamily syndication, GPs do all the work (time), while LPs exchange their time for a substantial investment with great returns (money).
For the sake of detailing the amount of work required to run a property full cycle, let's explore what goes into the roles of the GP during a syndication.
Property Acquisition
Acquiring a multifamily property requires a lot of time and effort. You need to have teams in place, conducted a lot of research, have years of experience under your belt to get approved for certain types of debt financing without bringing on a key partner (KP), etc. The many tasks of property acquisition include:
Research well performing markets, submarkets, neighborhoods, and their economies, demographics, growth trends and rents
Build Broker relationships and get a steady flow of lead funneling
Dissect financial reports and underwrite a volume of potential deals
Submit LOIs and negotiate terms with the Seller with an attorney
Travel, perform due diligence, and conduct multiple site tours
Establish relationships with property managers, contractors, vendors, tax professionals, etc. who will help build out a business plan
If syndicating: establish relationships with investors to raise capital; hire and work with a SEC attorney to create a LLC, private placement memorandum (PPM), subscription agreement, adhere to blue sky laws, etc.; and present your deal deck to interested investors
As a summary, GPs find deals, review deals, verify projections, get deals under contract, and ensure a certain ROI attainable before presenting the opportunity to you, the LP. Once the groundwork is laid, the decision to invest with the specified strategy rests with you.
Holding Period
The structure of a syndication aims for a primary goal – profitability based on the property's designated business plan. The holding period is about executing the business plan, and is often considered the most important aspect of multifamily investing. Whether it involves implementing a Value-Add strategy to enhance rental income through minor renovations, conducting extensive remodels and lease-ups, or even demolishing a distressed property for reconstruction and leasing, operators formulate a plan, and execute that plan during the hold.
The holding period requires GPs to have profound asset management skills to make the property perform as intended, which will return the highest ROI to investors. Here's a detailed breakdown of the asset management process for GPs in multifamily syndication:
Execution of the business plan
Managing the property managers by holding frequent meetings
Overseeing renovations and capital improvements
Managing financials to optimize NOI (revenues vs. expenses)
Continuously analyzing the market
Conducting frequent property tours
Maintaining communication with investors via phone, email, newsletters, etc..
Tenant management/property marketing
Analyzing initial projections vs. actual performance and making adjustments as needed
Making cash flow distributions to LPs and sending annual K-1 forms to investors
Planning an exit strategy
Overall, effective asset management involves a comprehensive approach to ensure that the property operates smoothly, generates consistent income, and appreciates in value over time. It requires a keen eye for detail, strong organizational skills, and the ability to adapt to changing market conditions while staying aligned with the investment's objectives.
As a LP, you will receive receive cash flow distributions while GPs are managing the property. As mentioned, you should expect monthly, quarterly, and annual communication from the GPs about the performance of the property.
The Exit
GPs will liquidate the property when they are able to stabilize the property and meet projected returns. Some GPs would rather hold onto the properties longer for cash flows, while some would rather take the equity and reinvest into other value-add deals. There are advantages and disadvantages of each.
The tasks associated with selling the property included many of the tasks already outlined above; engaging professionals, performing market analysis, negotiating with Buyers, investor communications and execution.
Upon the syndication's liquidation, you, the LP, recoup your original investment (sometimes some or all is returned during the holding years) including any residual cash flows not realized during the holding period (preferred returns). Any remaining profit from a property sale, if higher than expected, is divided among investors based on their ownership percentages, termed the profit split.
I hope you can see, as a LP investing in multifamily syndications, your role and investment is truly PASSIVE. It is an exchange of time for money, that can provide substantial returns and tax benefits.
HOW TO PARTICIPATE IN OFFERINGS
As you begin to venture in to multifamily investing, you'll see this space has a pretty decent appetite for seasoned investors. Many offerings fill up fast as this investment class offers a great alternative to the stock market, a hedge against inflation, portfolio diversification, and good returns to boot.
As a LP, it's not out of the ordinary to double your invested capital in 5 years, and this is truly Passive!
Things to consider
Time
You might be wondering: How long does a real estate syndication typically last? Be prepared to commit your capital for 5-7 years or the time frame indicated in the investment summary – this varies with each deal. Analysis considers current financials and potential proformas to ensure profitable returns, determining the holding period.
Illiquidity
If your used to investing in the stock market, multifamily investing is pretty illiquid. In most cases, it is very hard to receive your invested capital back before the property goes full cycle. You should be comfortable with investing that money for 5-7 years.
Accreditation
Who can invest in real estate syndications? While many investments seem exclusive to accredited investors or those with substantial net worth, a minority of offerings welcomes non-accredited investors. Certain restrictions apply, and legal investment requires familiarity with the sponsor, governed by SEC law.
Minimums
Due to the amount of capital required to purchase commercial real estate, multifamily syndications require a substantial investment amount from LPs. Usually, that limit is set at $25,000, $50,000, or $100,000. These limits are usually set by type of structure, 506(b) or 506(c), and the purchase price. For example, 506(b) offerings are open to non-accredited investors, but are limited to 35 investors per offering. If a GP needs to raise $1M to fund a deal, a $25,000 investment will be too low ($25k x 35 investors = $875,000), so the GP will likely make a minimum threshold of $50,000 per investor.
Get Started Today!
Curious about the process? Here's a basic overview of investing in a Real Estate Syndication:
The sponsor announces an open deal for funding, often via email to their subscriber list.
Review the deal, study the investment summary deck, and decide on investment.
Register on an investor portal, submit a soft commitment (reserving your spot to invest), and indicate your interest level.
Attend an investor webinar hosted by the sponsor for updated information and Q&A.
Secure your spot in the deal, gaining access to legal documents like the Private Placement Memorandum (PPM).
Sign the PPM and invest the desired funds via wire transfer or check.
Confirmation of fund receipt is received from the sponsor.
The sponsor notifies you when the deal closes and outlines what follows.
Stay updated through newsletters about property performance and updates
Pro tip: Consider placing a soft reserve of a higher amount than you intend to invest, as reducing the investment amount is easier than increasing it if the syndication is already oversubscribed.
In Summary, multifamily syndications are a great way to invest in real estate passively. As a Limited Partner, you can concentrate on your career and business growth, while someone else handles the day-to-day operations of managing the property.
Equipped with essential knowledge, are you prepared to delve into multifamily syndication investments? We're here to guide you every step of the way!
Here's to your success,
- Your Skyscape Equity General Partners
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